The Shifting Shares View: Why Director Holdings Matter

25 Jun 2019

The job of a CEO is to work for shareholders to create
shareholder value. Or so that is how it’s supposed to be. The real job of a CEO
is to promote the company and sell shares. This is especially true of many AIM
listed companies that are not self-sustaining and rely on equity placings to
keep the lights on and the salary coming in.

Replace the word “CEO” with “sales person” and very often this will not change the meaning. We should always be careful of anything the CEO, or any director, says, because they will tell us what we want to hear.

Check how much stock they own

Directors will love to tell us how they are ‘aligned’ with
us. However, very often when we drill down what they say is very often
completely different to what they are actually are. A good example recently was
a CFO animatedly telling how he was very aligned with shareholders because he’d
taken £20,000 in the recent placing.

I asked him his annual salary, and asked him what this was
after tax. As it turned out, this was just over two months’ work! The smile
soon left his face when I told him this.

Another trick they like to try is to tell us they are
‘incentivised’. Management often likes to give themselves nil-cost options
(free money at the expense of shareholders). They say this is to protect other
companies from poaching the directors, but that doesn’t explain why the
remuneration committee (often ran by the same directors who decide their own
pay) does not at least tie these options to performance.

Empire building

One problem that arises for shareholders when management are
not aligned is that the directors are keen to build up their own empires
whatever the cost. Acquisitions are considered not on their value accretive
merit but on their impact on director egos.

Another problem on AIM is that acquisitions do not have to
be put before shareholders. This means that directors can make grandiose plans
and act on them without needing General Meeting approval. Directors who did not
buy stock with their own hard-earned cash will not be aligned with shareholders
when it comes to doing what is best for long-term shareholder value creation.

Check where those
shareholdings came from

Sometimes directors can own a lot of stock, and be the
largest shareholder in a company, but that doesn’t mean they necessarily paid
for it. Someone could create a company in their own garage, list it on AIM a
few years later, and very quickly become a multi-millionaire without putting a
lot of their own capital in.

Their focus can then turn to promotion of the stock rather
than progress, because they need retail appetite to support the stock as they
still need to cash out!

CEOs that rapidly become wealthy can sometimes lose that
motivation to become a success once they’ve cashed out a cool few figures. It’s
always worth checking if that is true of the director in question.

Entrepreneurial
management

Management who do own stockand want to get rich by maximising shareholder value, rather than
maximising their salaries they take from the company, are management worth researching
and investigating. Always check director remuneration and director
shareholdings, and ask yourself: are the directors working for themselves or is
the company a vehicle to fund their lifestyle? There are no hard rules on this
but you should be able to make up your own mind when looking at the facts.

You can learn more investing insight from Michael by
reading his fantastic free e-book How to Make Six Figures in Stocks.
This can be downloaded from his website – https://www.shiftingshares.com/

The S&P500 has reached new highs again. It’s likely to run on to tackle the 3000 milestone level shortly, where the chart suggests strong headwinds lie. But during the past decade bull run, (assuming we’re still in one) investors have seen this scenario play out positively before - where a big move upward followed with gusto, despite seeming unlikely. Will the third time be so lucky?

Crowd Equity for Placings, IPOs and Live Market Blockbuilds, designed to give provate investors access to placements and Intial Public Offerings (IPOs), predominantly on the London Stock Exchange’s Alternative Investment Market (AIM).

Disclaimers

The content of this site is intended to be used, and must only be used for information purposes only. It is very important to do your own analysis before making any investment based on your personal circumstances. You should take independent financial advice from a regulated FCA advisor in connection with, or independently research and verify any information that you find on this site, and wish to rely on whether for the purpose of making an investment decision or otherwise. No news or research item is a personal recommendation to deal or invest in any particular company or product, nor does Valuethemarkets.com or Dynamic Investor Relations Ltd endorse any investment or product.

This website is a news website only. Valuethemarkets.com and Dynamic Investor Relations Ltd are not a broker/dealer, we are not an investment advisor, we have no access to non-public information about publicly traded companies, and this is not a place for the giving or receiving of financial advice, advice concerning investment decisions or tax or legal advice.

We are not regulated by the Financial Conduct Authority. You will have no right to complain to the Financial Ombudsman Services or to seek compensation from the Financial Services Compensation Scheme.
All investments can fall as well as rise in value so you could lose some or all of your investment. Past performance is not an indicator of future performance.